Strategizing International Tax Best Practices – by Keith Brockman

Archive for May, 2014

Tax Policy statement: A foundation of the Tax Risk Framework

EY has put forth a compelling article addressing the necessity of a company tax policy, stating it is not an option to delay action and hope the debate over transparency and what represents a fair share of tax will stop.  The article is referenced by the following link:

http://taxinsights.ey.com/archive/archive-articles/the-future-of-tax.aspx

Key excerpts:

So how can companies adapt to this new landscape and best address the different concerns of these very engaged stakeholders? It starts with formally and carefully defining a company’s tax policy, which gives effective guidance from the board to the group tax function on what the company’s responsibilities and required behaviors are worldwide.

This policy needs to take account of the often conflicting interests of various constituencies, such as tax authorities, investors, employees, the media and the general public. In the future, a business model must adjust to recognize that, while commercial decisions must continue to take account of tax analysis, such analysis itself needs to include wider business risks.

A company’s tax policy will also help in determining how transparent a company wishes to be with stakeholders about its tax affairs. Companies are concerned that stakeholders could misinterpret the complex nature of their tax affairs.

Any effective tax policy needs to strike a balance between clearly communicating the risk appetite and approach of the company, while also managing all costs, including opportunity costs caused by its tax approach and its consequences regarding reputation and the risk of controversy.

 

Best Practice: One of the foundations, and a good starting point for the Tax Risk Framework, is a tax policy.  The policy should be drafted with the knowledge that it is a valuable tool which the tax authorities may request to better understand, and assess, the company’s global tax risk.

 

Tax risk & controversy: EY highlights

Ernst & Young (EY) have published their 10th issue of T Magazine, highlighting the topics of tax risk and controversy.  The link is attached for reference:

http://taxinsights.ey.com/system-admin/editions/tmagazine10-2012-low.pdf

Key Highlights:

  • GAAR, Burden of proof: Taxpayer, Tax authority or Shared; summary of 24 countries.
  • Sustained government pressure on tax compliance means tax risk is now an issue for corporate boards, not just tax directors.
  • Clarity is now the key attribute in any message about tax that companies convey to the outside world.
  • As emerging markets become more confident and sophisticated, they are challenging commonly applied international tax standards.
  • The OECD’s “Tax Inspectors Without Borders” program (details in a prior post of 9 June 2013) seeks to match demand from countries wanting assistance with complex international tax audits with the supply of international tax experts.
  • Companies need to improve local knowledge of risk rating processes in each Asian country, including key focus areas and potential audit triggers.
  • Organizations need to show a willingness to engage with policymakers and administrators to improve policy proactively.
  • Tax authorities are increasingly adopting the OECD’s concept of the  “economic employer” to determine tax liabilities, rather than a treaty residence rule.
  • Creating a PE is the biggest tax risk companies face from sending employees on business or assignments overseas.
  • An increasing number of companies have appointed a head of tax controversy to manage tax risk and its implications.
  • Companies must be prepared to become more transparent.

Tax risk and transparency are the new challenges to be met by multinationals.  The T Magazine is a valuable resource in understanding today’s risks, and the manner in which these issues will transform current standards into leading Best Practices, tax risk policies and processes.

 

OECD Guidelines for MNE’s: A valuable tool in the Tax Risk Framework

The OECD published the OECD Guidelines for Multinational Enterprises (Guidelines) in 2011, this being the latest version of the Guidelines.

A unique feature of the Guidelines is the implementation of National Contact Points (NCPs), agencies established by adhering governments to promote and implement the Guidelines.  They also provide a mediation and conciliation platform for resolving practical issues that may arise. Chapter XI of the Guidelines, Taxation, that begins on page 60 outlines important concepts including timely tax compliance, cooperation with tax authorities, compliance with the letter and spirit of the tax laws and regulations of the relevant countries, and conforming transfer pricing principles to the arm’s length principle.

These principles should form an important foundation for a company’s Tax Policy and/or Tax Risk Framework, providing transparent objectives in the global tax risk profile.  The link to the Guidelines are provided for reference.

There is also a link to  the Annual Report on the OECD Guidelines for Multinational Enterprises 2013, which describes the activities undertaken to promote the observance of the Guidelines during the period June 2012 – June 2013.  The Annual Report outlines the role of the NCPs, and content of proposed violations (inclusive of Taxation), that have been submitted for review.  All OECD countries, and 11 non-OECD countries (Argentina, Brazil, Columbia, Costa Rica, Egypt, Latvia, Lithuania, Morocco, Peru, Romania and Tunisia) adhere to the Guidelines.

http://www.oecd.org/daf/inv/mne/48004323.pdf

http://www.keepeek.com/Digital-Asset-Management/oecd/governance/annual-report-on-the-oecd-guidelines-for-multinational-enterprises-2013_mne-2013-en#page175

The Guidelines should be a valuable Best Practice tool in a Tax Risk Framework, as well as the total risk framework of a multinational enterprise.

TP disclosure on tax returns: Malaysia

The Malaysian Inland Revenue Board (MIRB) has added a new check box on the 2014 tax return form for corporate taxpayers to declare whether transfer pricing documentation has been prepared.  Contemporaneous documentation should be prepared accordingly (i.e. 7 months from the close of the financial year).  The KPMG Newsletter describing this new initiative is referenced at the following link:

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/tp-malaysia-may6-2014.pdf

Re: Best Practices, new transfer pricing boxes / questions on tax returns are becoming a common practice.  Some questions by a multinational to ensure proper governance for tax return transfer pricing disclosures include:

  • What internal governance mechanism is in place to alert the tax dept. timely of new disclosures for proper planning of contemporaneous documentation, etc.?
  • Is the tax return preparer / reviewer knowledgeable about the transfer pricing documentation processes in place to answer the questions accurately?
  • If a transfer pricing question is to be answered negatively (i.e., no documentation exists), is there adequate time to proactively address, as applicable?  Is there any correlative impact for a financial statement tax reserve?
  • For transfer pricing methodology questions, who ensures the proper methods are accurately disclosed?
  • Is there a pre-audit strategy, upon notification, to review tax return disclosures?
  • Is there a documented process in the global tax risk framework that alerts the tax dept. of new disclosures?

These questions, among others, should be discussed to ensure internal and external alignment in a corporation’s tax risk policy.

 

TEI comments – OECD BEPS Action 2: Hybrid Mismatch Arrangements

Tax Executives Institute, Inc. (TEI) has provided comments on the OECD BEPS Action 2 proposal addressing hybrid mismatch arrangements.  The submission is referenced at the following link:

http://www.tei.org/Documents/TEI%20Comments%20-%20OECD%20BEPS%20Action%202%20Hybrids%20-%20FINAL%20to%20OECD%201%20May%202014.pdf

Some key highlights of Submission:

  • Some suggested solutions are overly broad and administratively unworkable.
  • The comments are not limited to hybrid arrangements that are inappropriate or abusive.
  • Simultaneous adoption by countries is encouraged, versus a question of adoption and / or timing of adoption by countries.
  • Double taxation issues, with Competent Authority requests, may increase.
  • A “bottoms-up” approach, applying only to instruments held between related parties, is recommended, using a 50% or greater rule for related parties.
  • For deductible payments not included in “ordinary income” of the holder’s jurisdiction, the term “ordinary income” should be expanded.
  • Further clarification could be provided by delineating how two countries that simultaneously apply their domestic anti-hybrid instruments can coordinate their application.
  • The impact on financial accounting in application of the hybrid rules should be considered.
  • Recommended rules for hybrids will not always produce uniformity due to differing tax systems (i.e., worldwide or territorial).
  • An anti-abuse rule adopted by the OECD should only apply in narrowly targeted axes of abuse, with strict bright line tests.
  • Bilateral tax treaties are not a tool to address legal tax planning adopted by various countries.

TEI’s excellent comments provide further insight into this significant, and broad, proposal.  Accordingly, they should be reviewed to understand complexities of adopting a complex rule without increasing risks of double taxation, with increased pressures on the Competent Authority process.

Introverts / Extroverts: Leadership Planning

Suzanne Bates publishes a highly recommended blog including leadership ideas and books to share; a reference to her Blog is accessed by the following link:

Power Speaker Blog by Suzanne Bates: Thoughts on Leadership and the Power of Communication:
http://www.bates-communications.com/powerspeakerblog/

A book recently recommended by Suzanne is entitled: Quiet: The Power of Introverts in a World That Can’t Stop Talking, by Susan Cain.  It highlights the importance of introverts, including differences in how they work with extroverts.  This book is also included in my Leadership Page: Books to Share.

Several ideas quickly materialize when talking about this subject:

  • Do you present ideas at a meeting necessitating immediate action for introverts and extroverts?  Do introverts have time to reflect and consider such actions prior to solution steps being introduced by extroverts?
  • An analogy for introverts vs. extroverts should also be considered for different cultures and how they work; some being more collaborative while others are more direct.  In a world of increasing diversity, this leadership trait should be practiced, and understood.
  • Are different personality characteristics of the team members understood by the team leader to ensure effective alignment?
  • Is this topic discussed among the team, allowing each member to understand different approaches by different individuals?
  • Are different responses by an introvert and extrovert embraced, including the phrases “I need a little time to think about this idea” and “Great, here is what I think we should do, when can we start?”
  • How do you effectively plan additional time for introverts to think about leading a meeting, or making a presentation?
  • How can introverts be extroverts in certain circumstances?
  • Are different people leading meetings?

Leaders need to understand the power of effectively communicating with different cultures and personalities, including introverts and extroverts.  This skill is often assumed and / or overlooked in career development.  It may be a good time for self-reflection to understand Best Practices, thereby becoming a more effective leader.

 

 

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